Nearly every private markets fund you will ever commit to is a limited partnership. Once you understand the machine, the same skeleton repeats across buyout, venture, credit, real estate and infrastructure. Only the assets change. The players are always the same: the limited partners who supply the capital, and the general partner who manages it.
The relationship between them is written down in one document, the limited partnership agreement. If you read one thing carefully in this business, make it that. Almost every dispute, surprise and disappointment an LP suffers in year seven traces back to a clause it did not read closely in year one.
The cast: LP and GP
The limited partners supply the capital and take limited liability: they can lose what they commit, but no more, and they have no hand in day-to-day decisions. The general partner manages the fund, sources and approves the deals, and carries unlimited liability, which in practice is wrapped in its own entity to contain the risk.
The GP earns two things. A management fee, typically 1.5 to 2 percent of committed capital, funds the team and operations during the years before exits arrive. Carried interest, typically 20 percent of the profits above a hurdle, is the real prize, the share of the upside that aligns the GP with the LPs, at least when the terms are set well.
What the LPA actually controls
The LPA sets the economics and the rules of engagement: the fee, the carry, the hurdle, the investment period, the fund term and every mechanism that matters when things get complicated. Buried in it are the clauses that decide real money and real control, and they are far more negotiable than a first-time LP assumes.
Watch four in particular. The key person clause protects LPs if the partners they backed leave. Recycling lets the GP reinvest returned capital, quietly increasing how much gets deployed. Extension provisions decide how long the fund can run past its stated term. And the fee base, whether fees are charged on committed or invested capital, changes the total cost meaningfully over a decade.
Why the alignment is never perfect
The structure is designed to align GP and LP through carry, but the alignment is partial. A GP that has already earned a fortune in fees has less at stake than the pitch suggests. A GP raising its next fund is incentivised to show quick paper gains, not just to compound patiently. The LPA is where those tensions are either contained or left to fester.
The practical lesson is that reading a fund is reading its documents, not just its track record. A strong past return under weak terms can still deliver a poor net outcome to the LP. The mechanics are the difference between the return the GP earns and the return you keep.